The payback period may be more appropriate to use for companies experiencing capital rationing.
When a company would like to know the duration or the number of years in which would like to recoup its initial investment from a project, it uses a capital budgeting technique called the payback period. To calculate the payback period. the initial investment to be subtracted from the annual cash inflows and once the project has a positive cash flow that is higher than the initial investment, the payback period can be determined.
Answer and Explanation:
The correct answer is True
When a company is experiencing capital rationing, the company is restricting the number of investments it can outpour and will only choose the profitable investments. The payback period can help in choosing a profitable investment.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Financial Accounting: Help and ReviewChapter 5 / Lesson 24